Opiate Crisis Driving Up Home Prices?

Financial Sense Newshour recently spoke with Dr. Frank Nothaft, Executive and Chief Economist at CoreLogic, about the US housing market and why home prices are likely to continue appreciating, though at a slightly lower rate, in 2018.

Good News: Demand Is High and Rising

The real estate market could be up 5% or more this year, Nothaft stated, and could possibly rise another 5% next year in 2018.

The driving force behind this is low home inventory levels, he added, along with low mortgage rates and an improving economy.

“Those are all good ingredients for stimulating demand,” he said. “If you have more demand to buy homes with a restricted supply of homes available for sale, that translates into home price growth.”

While some markets in the United States still have homeowners who are underwater, the numbers are relatively limited. Also, prices are up broadly, just not enough to cover the deficit in equity some of these people are dealing with.

Labor, Land, and Lending

Despite high demand and low mortgage interest rates, homebuilders haven’t ramped up construction of new homes, leaving a shortfall in supply.

This boils down to what Nothaft identified as the three “L’s”: Labor, Land, and Lending.

When the housing bubble popped in 2008 and 2009 and the Great Recession took hold, many construction workers moved to other jobs and industries or left the country by moving back to Mexico.

This has left home builders with a labor shortfall that is difficult to cope with, Nothaft noted.

Opiate Crisis Contributing to Worker Shortage

On the surface, most would think that a drug crisis would put pressure on home prices as individuals cope with job losses and the general fallout that results from having an addiction. Looking deeper, however, we see America’s opiate crisis having the opposite result.

In the latest data from the Bureau of Labor Statistics, the percentage of unfilled job openings in the construction sector is the highest it’s been in 17 years. And that just underscores the challenges that builders are having identifying and locating the labor they need to build homes. Some of it is from those that moved out of the country or moved to different jobs, but another challenge, sadly enough, is the opiate crisis. There are many prospective job seekers that come to a worksite but fail a drug test and for a lot of the jobs out of construction sites, and for building homes, you need to have workers that are present, not just physically, but mentally as well.

Given all of the above, that limits how quickly a builder can develop and build out properties, leading to lower supply relative to demand.

“It’s really a confluence of events,” Nothaft said. “Labor, land, and lending (restrictions are) working together to slow the pace of construction recovery.”

Tax Reform May Impact High-Cost Markets

The way tax reform is currently structured, it will likely have some impact on housing markets, Nothaft stated, especially in high-cost markets.

For example, the proposed changes on capital gains would require homeowners to remain in their homes for an additional 3 years, which may lead to less supply on the market.

But larger demographic forces, such as Millennials’ delayed household formation and Baby Boomer retirement, are likely to push demand higher in the future.

“There’s ample demand for affordably priced homes,” Nothaft said. “But that’s the real challenge, and that’s also where we have the shortest supply.”

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